Market Commentary

Where are Treasury bonds going?

The direction of bond yields is influenced by investors’ expectations for economic growth, among other factors. When economic growth is expected to weaken, bond yields tend to move lower. When economic growth is expected to strengthen, bond yields tend to move higher.

Investors didn’t stumble over inflation last week. Why not?

Inflation – rising prices of goods and services – can be measured in a variety of ways. For example, the Consumer Price Index considers changes in the amount consumers pay for goods and services – a bag of carrots, a gallon of gas, or a doctor’s appointment. The Producer Price Index (PPI), on the other hand, considers changes in the amount producers – such as farmers, manufacturers, or physicians – charge for goods and services.

Zoom, zoom, zoom.

Big economies tend to recover from recessions about as quickly as semi-trucks accelerate from stop lights. In other words, recovery tends to be slow. That may not be the case this time.

Last week, unemployment claims were looking good and consumers were feeling good.

The number of Americans applying for first-time unemployment benefits declined. Just 684,000 people filed claims during the week of March 20, down 97,000 from the week before, according to last week’s report from the Labor Department.

What are professional asset managers thinking?

Bank of America recently published the results of its March global asset managers’ survey, which polls 220 professional investors responsible for about $630 billion in assets, reported Julia La Roche of Yahoo! Finance.

Investors had a lot to be enthusiastic about last week.

Major stock indices in the United States soared, finishing the week higher and setting new records along the way, reported Al Root of Barron’s. There was plenty of good news to fuel investor optimism:

Neanderthal DNA may make people more – or less – susceptible to COVID-19, reported The Economist. It all depends on whether you have the genes and, if you do, which DNA string you inherited.

Students of financial markets may have noted a historically unusual event last week.

On Thursday, the yield on 10-year U.S. Treasury notes briefly matched the dividend yield for the Standard & Poor’s (S&P) 500 Index. This type of convergence is uncommon. In normal times, the yield on 10-year Treasuries tends to be higher than the dividend yield of the S&P 500. Felix Salmon of Axios explained:

It’s a contrarian’s dream come true.

Contrarian investors like to buck the trend. They buy when other investors are selling and sell when others are buying.

Way back, when radio disk jockeys played 45-rpm vinyl singles, the A-side of a disk was the song the record company was promoting and the other side – the flip side – held a song that sometimes had an equal or greater impact. For instance, the flip side of Queen’s We Are the Champions was We Will Rock You.

It’s not a black diamond ski run yet, but the yield curve for U.S. Treasuries is steeper than it has been in a while.

A yield curve is the line on a graph showing yields for different maturities of bonds. Yield curves provide insight to bond investors’ perceptions about the economy. There are four basic types of yield curves:

They say people watching the same event often see different things. That seems to have been the case last week when share prices of a few companies experienced tremendous volatility.

Some cast the events as a David vs. Goliath morality tale, however, Michael Mackenzie of Financial Times saw it differently. He wrote, “…a speculative surge from retail investors using borrowed money…has in the past signaled a frothy market top.” (In financial lingo, a market is ‘frothy’ when investors drive asset prices higher while ignoring underlying fundamentals.)

Last week, as COVID-19 vaccination efforts continued, there was speculation about stock market corrections and asset bubbles.

On Sunday morning, Bloomberg reported 63 million doses of the coronavirus vaccine had been administered across 56 countries. In the United States, 21.1 million shots have been delivered – about 51 percent of the vaccinations that were sent to states. At that point, the pace of vaccination in the United States was just over one million doses a day.

Investors were rocked by economic data showing the economy hit the brakes hard in December.

Last week, major U.S. stock indices decelerated as investors gaped at the economic damage caused by the rising number of coronavirus cases around the world. There have been more than two million COVID-19 deaths globally, with more than 390,000 deaths in the United States. The spread has resulted in new lockdowns and restrictions and has hurt economic recovery.

The event at the United States Capitol building had a resounding impact around the world, but it didn’t deter global stock markets.

Last week, investors weighed the violent disruption of America’s 2020 presidential election process against the outcome of the Senate runoff in Georgia, and decided the latter was more significant. Financial Times reported the Democratic party’s win in Georgia improves the possibility of additional government relief spending in 2021:

Last week was the cherry on top of a turbulent year for investors.

After the $900 billion fiscal stimulus bill was signed on Sunday, major U.S. stock indices moved higher. The Washington Post reported, “The S&P 500-stock index, the most widely watched gauge, is finishing the year up more than 16 percent. The Dow Jones Industrial Average and the tech-heavy Nasdaq gained 7.25 percent and 43.6 percent, respectively. The Dow and S&P 500 finished at record levels despite the public health and economic crises.”

U.S. stock markets remained calm as a fresh chapter opened in the coronavirus stimulus saga last week.

Congress managed to cobble together a new stimulus package that was acceptable to both sides and pass it. The proposed package included money to help states distribute vaccines, an unemployment benefits extension, $600 checks for eligible Americans, aid for airlines, and other provisions, reported Mike Calia of CNBC.

Congress is at $900 billion, will they hear $1.4 trillion, $1.4 trillion, governments at $900 billion, who’ll go $1.4 trillion, $1.4 trillion…

The stimulus auction continued last week. Early on Sunday, The New York Times reported, “Lawmakers are on the brink of agreement on a $900 billion compromise relief bill after breaking through an impasse late Saturday night, with votes on final legislation expected to unfold as early as Sunday afternoon and very likely just hours before the government is set to run out of funding.”

When it comes to beverages, frothy can be delicious.

In what may be the least inspiring description of fizzy drinks ever written, a group of food engineers explained, “Aeration in beverages, which is manifested as foam or bubbles, increases the sensory preference among consumers.”

When is bad news good news? Take a look at last week.

Major stock indices in the United States hit all-time highs on Friday, despite a lackluster employment report and a surge in COVID-19 cases, reported Lewis Krauskopf of Reuters. During the week, we saw:

Last week, vaccine optimism immunized investors against signs of economic weakness.

In previous commentaries we’ve written about narrative economics, which holds that popular stories may affect individual and collective economic behavior. Last week, diverse narratives had the potential to influence consumer and investor behavior, but not all did. You may have read that:

The U.S. economy is like a semi-trailer truck. No one likes being stuck behind a semi at a stoplight because big trucks don’t go from zero to 60 in 2.5 seconds. Neither does the U.S. economy.

When the pandemic brought our economy to a near virtual standstill early in 2020, the U.S. government and Federal Reserve (Fed) took extraordinary measures to help the economy get going again:

Vaccine can be a powerful word. It’s worth 14 points in Scrabble (42 on a triple word square) and, last week, it was worth a whole lot more than that to financial markets.

On Monday, a pharmaceutical company and a biotech company announced preliminary trials of their vaccine show it may be 90 percent effective, reported Financial Times. The revelation conjured tantalizing visions of a future in which virus precautions are unnecessary and life returns to normal.

It’s said markets hate uncertainty, but that wasn’t the case last week.

Despite tremendous uncertainty about the outcome of the United States election, major domestic and international stock indices moved higher and the CBOE Volatility Index, better known as Wall Street’s fear gauge, moved 35 percent lower. Ben Levisohn of Barron’s reported:

Last week, financial markets and economic data told very different stories.

Reviewing economic data is a bit like looking in a rearview mirror. Typically, it offers information about what is behind us. For example, last week we learned:

Stimulus talks led investors in a merry dance last week.

So far in 2020, stock markets have been sensitive to fiscal stimulus. Last week, there was optimism a new stimulus package could be negotiated before the election. There also was skepticism about whether it would happen. An expert cited by CNBC stated, “There’s a lot of back and forth on stimulus and every headline makes the market move a little bit, but there’s no follow-through because we don’t have a clear picture on that front.”

It was a turbulent week for investors.

Waves of positive and negative news buffeted financial markets last week:

Yes. No. Maybe?

Markets were sharply focused on the status of stimulus last week. First, it was on. Then, it was off. Then, it might be on. Then, it was off again. There was a big bill. There was a smaller bill. There were stand-alone options.

Last week, the third quarter of 2020 came to an end – and the fourth quarter delivered a doozy of an October surprise.

President Trump has the coronavirus

On Friday Americans awoke to the news President Trump had contracted COVID-19. Financial markets responded with relative equanimity. After a brief sell-off on Friday, major U.S. indices finished the week, and the third quarter, higher.

For four weeks, the U.S. stock market has sparked and sputtered like a campfire in light rain.

Today, pandemic-driven demand is providing fuel for the investors. The need for certain types of products and services has accelerated and innovation is creating new opportunities. Consider:

Investors weren’t happy with central banks last week.

After the Federal Open Market Committee (FOMC) meeting, Federal Reserve Chair Jerome Powell confirmed the economy is recovering more quickly than anticipated:

Last week, the Nasdaq Composite Index set another record.

So far, 2020 has been memorable for many reasons, not the least of which is the incredible speed at which some events have been occurring in financial markets. This year, we’ve experienced:

Stock markets in the United States retreated a bit last week.

U.S. stocks have been trending higher for months. Last week, they gave back some gains. The Nasdaq Composite dropped 3.3 percent, while the S&P 500 Index fell 2.3 percent, and the Dow lost 1.8 percent, reported Ben Levisohn of Barron’s.

The stock market rallies like it’s 1986.

August has been a good month for stock investors. At the end of last week, the S&P 500 Index was up 6.8 percent for the month. The Index is poised to deliver its best returns for the month since 1986, when it gained 7.1 percent, reported Financial Times.

The shortest bear market in history is over.

The Nasdaq Composite and Standard & Poor’s 500 Indices finished at new highs last week. The stock market is considered to be a leading economic indicator, so strong stock market performance suggests economic improvement ahead.